Bundling Slows Voice, Messaging Margin Erosion

February 28, 2014By: Gary Kim

Whether particular products are best sold on a metered or un-metered basis is an important question for service providers. Sometimes one approach makes more sense than the other, and sometimes the approach changes with the product lifecycle.

Dial-up Internet access only became a mass market phenomenon when AOL (News - Alert) converted to unlimited usage rather than metered billing for its access service.

ISPs generally are moving to a “buckets of usage” approach for high-speed access that is a rating blend, no specific charges for usage within an allotted usage plan, but flat rate overage charges for specific amounts of consumption above the purchased plan limit.

That hybrid approach essentially combines the advantage of unlimited usage plans, which is that people are encouraged to use the service, with the ability to correlate usage with revenue.

Generally speaking, telcos have preferred a metered approach to selling their most popular products, especially products that have driven overall revenue growth.

At one time, international voice and national long-distance were in that category.

But service providers—cable and telco alike—now also are learning that shifting to an un-metered approach will help preserve revenue and margins for products with declining demand.

Consider voice and mobile messaging, both facing pressure from over the top alternatives.

Service providers such as Verizon and AT&T (News - Alert) now offer unlimited usage of voice or text messaging on their lead subscription plans, so long as those products are purchased in a bundle including other products with stronger growth.

Telcos have learned that triple-play bundled services not only increase revenue per account, but also reduce churn.

They now also have learned that converting metered services to non-metered services inside bundles has additional value, namely reducing revenue loss for legacy services that have declining levels of demand.

In the Netherlands, for example, KPN (News - Alert) saw a 13 percent fall in consumer mobile service revenue in the fourth quarter of 2011, and warned of a poor 2012 outlook, in large part because its declining voice and messaging services were not protected by being moved to a bundle, Fitch Ratings argues.

In contrast, Vodafone (News - Alert)'s Netherlands business saw a much smaller impact in the same quarter because of its earlier introduction of integrated tariffs that protected some level of voice and messaging revenue.

So we are likely to see a bigger shift to bundles putting voice and texting inside usage plans sold at a flat rate, at least in markets where demand for voice and texting is flat or declining.